When you're looking to finance a real estate investment, you have two choices for your leverage. You can go to a bank, or you can go to private real estate lenders. The two types of lenders have very different approaches to lending, and both can be a good fit depending on what you're trying to do.
Interest Rates and Origination Fees.
Generally, banks charge lower interest rates and origination fees than private real estate lenders. A bank's rates and fees are set in comparison to what other banks charge for the types of relatively safe deals on which banks usually prefer to lend. Private lenders take more risk and, as such, expect more compensation.
Loan to Value.
While LTVs vary, banks usually lend between 65 and 80 percent of a property's value, while private lenders typically cap their loans at 65 percent LTV. However, the two lenders aren't as different as they seem. Banks almost always lend on a property's current value, while some private lenders will lend on an after repair value for rehab properties. In these cases, the private real estate lenders' loan may actually come out larger.
In a perfect world, a bank can close a loan in 30 to 45 days. In the real world, they usually take 60 to 90 days, and can't give you a clear approval until relatively late in the process. Private lenders can usually close in a few weeks and may be able to close in a few days. They can also give you a great deal of certainty very early in the process.
Preferred Deal Type.
Banks prefer to lend on simple, safe deals that have stable values and incomes. Their financing is frequently tied to a property's debt service coverage ratio, which means that if the property's income isn't more than the mortgage payments, the bank won't make the loan. Private lenders like easy deals, too, but they'll lend on just about anything that offers the borrower and opportunity to make enough money to pay them back.
The Bottom Line
Banks are a great option if you have a simple, straightforward property to finance. Private real estate lenders, though, make loans on challenging properties. The challenging properties are usually the ones where you can make the most money, making a private real estate lender a crucial part of any savvy investor's stable of relationships.